CH 2 Flashcards
What are financial markets traditionally segmented into?
Money markets and capital markets.
What financial instruments are included in “money markets”?
Short-term, marketable, liquid, low-risk debt securities.
What financial instruments are included in “Capital markets”?
Long-term and higher risk (when compared to money market) securities.
What segments can Capital markets be subdivided into?
- Longer-term debt markets
- Equity markets
- Derivative markets (where options and futures are traded in)
What specific securities constitute under “Money markets”?
- Treasury Bills
- Certificates of deposit
- Commercial paper
- Bankers’ acceptances
- Eurodollars
- Repos and reserves
- Federal funds
- Brokers’ calls
What specific securities constitute under “The bond market”?
- Treasury bonds and notes
- Federal agency debt
- Municipal bonds
- Corporate bonds
- Mortgage-backed securities
What specific securities constitute under “Equity markets”?
- Common stocks
* Preferred stocks
What specific securities constitute under “Derivative markets”?
- Options
- Futures and forwards
- Swaps
What specific securities constitute under “Indexes”?
- Dow Jones averages
- Standard & Poor’s indexes
- Bond market indicators
- International indexes
Define “commercial paper”.
Short-term unsecured debt issued by large corporations.
Define “banker’s acceptance”.
An order to a bank by a customer to pay a sum of money at a future date.
Define “Eurodollars”.
Dollar-denominated deposits at foreign banks or foreign branches of American banks.
Define “repurchase agreements (repos)”.
Short-term sales of securities with an agreement to repurchase the securities at a higher price.
The securities are often of higher value than the purchase price paid, and act as collateral if the borrower defaults.
Define a “Eurobond”.
A bond denominated in a currency other than that of the country within it is issued.
Define “municipal bonds”.
Tax-exempt bonds issued by state or local governments.
Describe the two types of municipal bonds there are.
1) General obligation bonds:
municipal bonds backed by credit (taxing power) of the issuer.
2) Revenue bonds:
Municipal bonds backed by the revenues from a given project or by the municipal agency operating the project.
What is the yield ratio for municipal bonds?
r[muni] / r[taxable] = Yield ratio
What mathematical inequalities of the yield ratio determine whether you hold taxable debt or municipal debt?
1 > Yield ratio > 0 : Investors hold taxable debt
Yield ratio > 1 : Investors hold municipal debt
NOTE: Yield ratio = r[muni] / r[taxable]
Define “Callable bonds”.
Bonds that give the firm the option to repurchase the bond from the holder at a stipulated call price.
Define “Convertible bonds”.
They give the bond holder the option to convert each both into a stipulated number of shares of stock.
Define “preferred stock”.
Nonvoting shares in a corporation, usually paying a fixed stream of dividends.
What is a ‘Line of credit’?
Best described with an example:
- Take a line of credit loan of 10K
- you can withdraw up to a minimum amount of 10K, however if you only withdraw for example 2K, you will only be charged interest on the 2K you took out.
A line of credit is essentially a safety net.
